Volatility in February: Markets Recover After Unexpected Sell-Off

After a strong start to 2018, stocks went on a roller-coaster ride at the beginning of February in what was one of the most volatile weeks in the history of the U.S. stock market. All told, by the time things hit their worst moment at midday on February 9, the S&P 500 (SPX) was down more than 11% from the all-time high it posted January 26.

It was unusual how quickly the correction accelerated and trading has been a lot choppier over the past few weeks, especially compared to the steady climbs seen throughout most of 2017. The quick moves, combined with a lack of clear catalysts, left many investors looking for answers about what was going on. By mid-February though, the S&P 500 had recovered more than half of its losses and was down just 5% from the high. After all was said and done, the major indices were essentially back to where they started 2018.

What Woke the Markets Up?

Arguably, many people had been lulled by the low volatility of the last year and a half. Stocks went months without a 1% daily decline or advance, and just steadily moved upward.

When stocks are trading at all-time highs, it sometimes doesn’t take much to trigger a quick sell-off. Many people were waiting for a 5% to 10% correction just due to the fact that there wasn’t one in 2017. But the correction happened more quickly than many people expected.

Emotions aside, there’s no single explanation for this bout of stock market weakness. Some of the factors commonly cited by analysts included:

Wages rising 2.9% in January and concerns that a tight labor market combined with higher wage growth could result in higher inflation year over year.

Proposed deficit spending by Congress, which could inject more debt into the market and increase borrowing costs.

Concerns over potentially three more interest rate hikes based on comments from the Federal Reserve.

After a large rally in 2017, and a strong start to 2018, investors might’ve been looking to take profits.

A collapse in several volatility-related products after the CBOE Volatility Index (VIX) spiked by more than 100% on February 2.

How Did Stocks Bounce Back?

It seems like people jumped back into stocks just as enthusiastically as they bailed out of them earlier in the month, even though economic and company fundamentals haven’t really changed all that much. And there’s plenty of debate about why. Just like the sell-off, there are many potential factors at play for the rebound, such as:

Buyers emerging at the lows to take advantage of cheaper stock prices.

Some investors realizing higher interest rates can sometimes be good, which may be signaling economic strength. People might also feel more comfortable with rates heading back toward somewhat “normal” levels after years of yields effectively at zero.

Company news and economic data remained positive throughout February, with more than three- quarters of earnings reports exceeding Wall Street analysts’ expectations.

Corporations potentially executing corporate buybacks. So far this year, corporations have announced they’re buying back $171 billion in their own shares, the biggest amount in history as of this date. It’s hard to say how much of these buybacks have actually been executed so far, but you can’t necessarily rule out their effect, especially when stocks dipped more than 10% earlier this month, possibly making a buyback more appealing.

What Now?

Market corrections are natural, and they’re going to happen. What we don’t know is when, how severe they might be, and how long they’re going to last.

This isn’t a time to panic, and keep in mind that investing and emotions don’t mix well. However, times like these can serve as a good reminder to check in on your investments to make sure they are aligned with your short- and long-term goals.

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